By Dr. Brooks Robinson \BlackEconomics.org website.
Photos: YouTube
There is considerable evidence that innovation can provide great opportunities for economic expansion.[1] Of course, it is prudent to perform full “benefit-cost” analyses of innovation, which would encompass consideration of “secondary” impacts—i.e., accounting for positive and negative spillovers in affected industries. And beyond economic effects, there is the question of how innovation affects social welfare broadly.
As an example, consider the Internet as an innovation.
It is difficult to assess the total “positive” impact of the Internet on economic expansion. Note that Internet use was amplified significantly by the 2020-21 COVID-19 Pandemic. However, from the outset, it was transparent that use of the Internet involved more than just gaining access to an electronic devise and “connectivity;” operational software and security software were key requirements. Unquestionably, the full breadth and scope of Internet uses is yet to be determined, and the ways that one can be injured while using the Internet, too, has not been determined fully.
However, global cybercrime costs amount to $8 trillion in 2023.[2]In addition, it is estimated that at least $1.75 trillion is to be spent globally on cybersecurity equipment and services during 2021 – 2025.[3]
The point is that the $8 trillion and the $1.75 trillion must be subtracted from a valuation of the Internet’s benefit when performing a benefit-cost analysis. More importantly, not only does the cybercrime and the payment for cybersecurity equipment and services reduce the net financial or accounting benefit to individuals, firms, and government, but consider the enormous volume of hours that are expended when there are cybercrimes, which may not be accounted for at all in economic statistics when these efforts are performed on own account.
Also, we should not overlook emotional and mental anguish and physical injury caused when cybercrimes facilitate the illegal capture of information (ransom ware and espionage), sextortion, etc. Do we know how many young and old females and males have experienced highly elevated hypertension, heart malfunctions, or committed suicide due to these unwanted and painful occurrences. But, potentially, the most pernicious aspects of innovation are associated with occupational displacement. No doubt, innovation creates new jobs. But existing jobs often disappear immediately or over
time when innovations are adopted.
In certain cases, innovation is linked to on-the-job training that transitions existing workers to participate in innovation adoption. Also, there is the argument that it is favorable to continuously upgrade the workforce so that it can adapt to innovation. However, it is important to consider that innovation that is cheap and that can be adopted most easily is typically associated with low value jobs. The workers associated with these jobs receive relatively low levels of compensation and, therefore, can least afford to save and expend financial resources to retrain for participation in innovation adoption or to transition to other occupations.
Nevertheless, and to the extent that they are not already operational, the following provisions can help address job displacement that results from innovation:
• Assess a Pigouvian tax on direct beneficiaries of innovation and use the related revenue to fund education and training in new fields. However, this is an economically inefficient policy generally, and the tax may deter innovation.
• Permit workers to contribute on a pre-tax basis to individual “education accounts”and permit tax-free use of these contributions to respond to innovation displacement (Section 529 Plans).
• Mandate that the full spectrum of educational institutions (pre-K to post graduate school) incorporate into curriculums content concerning the vagaries of innovation and the need to prepare for it. This curriculum could be a subset of burgeoning financial literacy curriculums.
Importantly, a full benefit-cost analysis of innovation would account for the impact of labor displacing innovations on health. However, it is important to note that, while Brenner and Mooney (1982) estimated a sizeable and negative association between unemployment and health (i.e., higher unemployment was associated with poorer health outcomes) for periods leading up to the 1980s, Ruhm (2015) and others identified small procyclical associations between economic outcomes and health (i.e., health does not deteriorate when unemployment rises) for more recent periods.[4]
Innovation can certainly be favorable. However, to determine the favorableness of innovation, it is critical that we account for related downsides. It is only by performing full benefit-cost analyses that we can determine whether to adopt what appears to be well-being-enhancing innovations.
The importance of performing full benefit-cost analyses is highlighted in recent research by Hornbeck and Logan (2023).[5] They show that the benefits of US-styled slavery innovation did not exceed total economic costs. In addition, COP 28 (the 28th meeting of the Conference of Parties) provided the most recent evidence against the seeming positive net benefits of many innovations that have entered the market since the onset of the Industrial Revolution in the latter half of the 18th century.
Dr. Brooks Robinson is the founder of the BlackEconomics.org website.
References: 1 Daniel P. Gross and Bhaven Sampat (2023). “America, Jump-Started: World War II R&D and the Takeoff of the US Innovation System.” American Economic Review: Vol. 113, No. 12; pp. 3323-56; https://doi.org/10.1257/aer.20221365 (Ret. 121923). This article not only explores the transmission of innovative research to economic growth, but also cites expansively related research on the relationship between innovation and economic growth.
[2] Steve Morgan (2023). “2023 Cybersecurity Almanac: 100 Facts, Figures, Predictions, and Statistics.” Cybercrime Magazine. May 24; https://cybersecurityventures.com/cybersecurityalmanac-2023/ (Ret. 121923).
[3] Ibid. (Cybercrime Magazine)
[4] M. Harvey Brenner and Anne Mooney (1982). “Economic Change and Sex-Specific Cardiovascular Mortality in Britain 1955-1976.” Social Science & Medicine: Vol 16, No. 4; pp. 431-42, https://doi.org/10.1016/0277-9536(82)90051-X (Ret. 121923). And Chrisopher J. Ruhm (2015). “Recessions, Healthy No More?” Journal of Health Economics: Vol. 42, July; pp. 17-28, https://doi.org/10.1016/j.jhealeco.2015.03.004 (Ret.121923).
[5] Richard Hornbeck and Trevon Logan (2023). “One Giant Leap: Emancipation and Aggregate Economic Gains.” National Bureau of Economic Research, Working Paper 31758, https://www.nber.org/papers/w31758 (Ret. 120923).
